No matter what line of business you are in, the reality of being a successful entrepreneur is that you open yourself up to a number of unique risks—and the more successful your business is, the more risks you face.
Asset protection planning is intended to reduce or eliminate the risks of being in business by shielding your business and personal assets from litigants, creditors, and other potential threats to the fullest extent legally possible. It’s crucial to have asset protection strategies in place from the moment you open your doors, because once a claim or lawsuit is filed, it’s too late. If you try to protect your assets after a claim or lawsuit is even threatened, you could be at risk of being charged with fraud. So take action now, while there is nothing to worry about and many ways to protect your assets.
Last week, we discussed how you can use business entities and insurance coverage to protect your business and personal assets from common threats all companies face. Here, we’ll look at two additional strategies you should consider implementing when developing a comprehensive asset-protection plan for your business.
3. Put sound legal agreements in place
Although using proper contracts and other business agreements might not seem like a major priority for asset protection, the value of these documents should never be underestimated. Indeed, these agreements are designed to protect your company’s most essential elements: your personal liability, personal and professional relationships, intellectual property, and trade secrets, to name just a few.
In addition, legal agreements govern the rights and responsibilities of every party you do business with, from clients and vendors to employees and contractors. Given the importance of such documents, you should never rely on generic legal forms you find online when creating your business agreements. Instead, allow us to support you in creating, reviewing, and updating your company’s legal documents to ensure you have the most robust legal protections in place at all times.
In all cases, you must enter into legal agreements in the name of your business entity, not in your personal name. And be sure that your legal agreements include provisions requiring conflict resolution through mediation and arbitration, whenever possible, before litigation.
What’s more, in certain cases, the terms of your business agreements can be drafted to limit the level of liability and potential damages your business would face should a contractual dispute arise. That said, when it comes to limiting liability through contracts, state laws vary widely, so your agreements should be drafted and reviewed by a licensed business attorney like us.
4. Protect your business with trusts
If you’re looking for the maximum level of protection, you may want to consider using specially designed trusts to safeguard your business. Such trusts are set up so that your business is owned by the trust, not you, and since you can’t lose what you don’t own, your company and its assets can’t be reached by creditors or lawsuits.
These asset-protection trusts are not the same as living trusts designed to protect the inheritance you want to leave for your family from the court process called probate in the event of your death or incapacity. Living trusts are revocable, meaning you still own the assets held by the trust while you’re alive, and as such, you can dissolve the trust or change its terms during your lifetime. Because you still retain ownership of assets held by revocable living trusts, a revocable living trust does not provide you with any asset protection from creditors. Asset protection trusts, however, are irrevocable.
The most airtight protection is provided when you never own your business to begin with, and when the business is started by you as the trustee of an irrevocable trust set up for you by a parent or grandparent. And if you anticipate growing the value of the business significantly, this kind of trust setup can also provide extremely valuable estate tax protection. The one hitch here is that you have to have parents or grandparents who thought ahead and left you an inheritance inside an irrevocable trust at their death, or who are willing to set up an asset protection trust for you during their lifetime, so you can start your business with this airtight protection.
If you already have an ongoing business that you want to protect using asset protection trusts, you can transfer your business into a creditor-shielded asset protection trust, but there are many restrictions, and your protections will only begin after several years, depending on the state in which the trust is established. If this is something you’d like to consider to protect your assets from creditors that may arise in the future, or from significant estate taxes in the future, contact us now to discuss the options.
A strong legal foundation
To ensure these strategies are put in place and maintained properly, having an experienced business lawyer like us on your advisory team is a must. As your Family Business Lawyer®, we'll help you develop, implement, and enforce a full array of asset protection strategies at every stage of your company's evolution.
Contact us today to schedule an analysis of your business' current risk exposure, so we can ensure your company’s legal foundation is strong enough to withstand whatever threats you might face.
This article is a service of Erin Williams, Family Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. 720-312-1874